Patents and Innovation Economics

This intriguing question and its implications for US economic policy are tackled in the groundbreaking book Great Again, by Henry R. Nothhaft with David Kline. They answer the above query with a series of questions:

Could a twenty-year-old college dropout, just back from six months in an ashram somewhere, attract funding for a capital-intensive venture based on the manufacture (yes, the manufacture) and sale of a $2,500 consumer product unlike any that had ever been bought by consumers before? One whose potential uses were at best unknown, and possibly nonexistent? And one for which the total current market size was exactly zero?

Not only could Apple not get funded today, it probably could not go public. Nor would Apple have received its first patent (USPN 4,136,359) in only 20 months. The book asks “how many of today’s Apples are not getting a chance?”

The authors use the above example to make a broader point that theUSis failing economically and technologically because of the policies we are pursuing. They show that all net new jobs created in theUSsince 1977 (and possibly longer) were created by startups like Apple. All increases in real per capita income are due to new technologies and most revolutionary/disruptive technologies are created by startups and individual inventors. So what are the policies that have undermined our economy, by undermining technology startups?

The book examines five areas:

1.Role of regulations. The Authors show that our tax policies, Sarbanes Oxley and our indifferent (some might say arrogant) regulators’ application of well meaning regulations to startups is driving them either overseas or out of business.

2. Underfunding the patent office. This is costing theUS millions of jobs and billions in GDP. According to the authors, each issued patent is worth 3-5 jobs on average, particularly patents issued to startups.

3. Manufacturing policies in the US. Manufacturing is key, particularly in a world that does not respect property rights in inventions, to ensuring that theUS profits fromUS innovation and not other countries. TheUS is also losing the global battle for human talent.

5. Funding for research. The book shows that our spending on basic science and engineering is not only declining as a percentage of GDP, but the system has become short-term oriented and bureaucratic.

While this book tackles complex issues, it is a quick easy read. It is full of interviews from entrepreneurs, venture capitalists, and technologists who built America’s technology startups over the last three decades. Great Again provides numerous real life examples to illustrate its points.

This pioneering book shows how the US can create jobs and increase per capita income. The policy prescriptions are based on solid science. Just cutting government spending (balancing the budget) will not cause theUSeconomy to grow vigorously, we need pro-growth policies. The authors are some of the few people that understand what policies are needed for the US to be GREAT AGAIN.

Stock trader, Howard Lindzon, believes that it is less risky to invest in start-up companies than the stock market. He made this stunning statement in an interview on Tech Ticker (please see the full interview). Mr. Lindzon believes that the stock market is rigged and that investors have more control when they invest in start-ups.

I don’t know whether this is good news or bad news. It is good news that at least one investor is more interested in building businesses than just trading stocks. On the other hand it is bad news if even a professional trader believes the stock market is rigged.

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A significant portion of the value of stocks is represented by intangible assets. According to Ocean Tomo, Patent Attribution to Equity Returns, 75% of the value of the S&P 500 is intangible assets. The Bilski case in front of the Supreme Court could significantly affect the value of these intangible assets.

Bilski is a case about whether certain types of technology are patentable subject matter. The patent in this case was directed to a financial system for hedging commodities risk. However, the Supreme Court may use this case to undermine patents related to software and business methods. If the Court does significantly limit the patentability of software based inventions, the value of the intangible assets of many of these companies will be significantly reduced. (For more information on the Bilski case see, Bilski, Financial Patents, and the Financial Crisis , and Bilski, Software Patents and Business Method Patents .

The most important intangible asset of most companies is their patents. The nadir in this country’s legal atmosphere for patents occurred in the 1970s. It is not surprising that the chart above shows 1975 as the year when companies had the lowest percentage of their value represented by intangible assets. According to the book, The Invisible Edge , the FTC & DOJ used antitrust law to force US companies to give away the technology associated with over 50,000 patents. The result was the U.S. transferred its cutting edge technology to Japan and many U.S. companies found themselves unable to compete with the Japanese. The book cites a MITI study that substantiates that most Japanese companies took advantage of this traitorous policy by the U.S. government to catch up with U.S. companies technologically. This policy also resulted in reduced research and development spending. Continue reading →

This post is the Introduction to my book, which should be available on Amazon.com in December of 2009.

This book started as a project based on my observations. I deal with technology start-up entrepreneurs everyday as a patent attorney. I noticed a difference between the sort of projects my clients were undertaking since the technology downturn of 2000-2001 and the 90s. Clients, in the 90s, would come into my office with plans to build businesses that were disruptive or revolutionary. The technologies underlying these companies held the potential to completely redefine a market. Some of these of these ideas would increase the available bandwidth by 10x for minimal costs or allow data searches that were 10-100x faster than existing technologies. It was extremely exciting talking with these entrepreneurs. Their energy was infectious and the potential implications of their work was mesmerizing. The technology downturn of 2000-2001 forced a reevaluation of these aggressive business plans. I expected that after a couple years of the technology market taking a breath, I would again be working with companies trying to change the world. Continue reading →

A patent is an attempt to create a “barrier to entry” from a business perspective. Other barriers to entry include advertising, control of key resources, economies of scale, exclusive supplier agreements, etc. An effective patent strategy will focus on the product’s or company’s unique selling points. The goal is to focus the claims of the patent(s) on the technology that provides the unique selling points. This will result in a patent(s) that provides the strongest barriers to entry and make it easy to spot competitors that are infringing your patent(s). Continue reading →

None of these securities laws were able to prevent the stock market decline of 2000. Sarbanes Oxley was passed in 2002 in reaction to several corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, and WorldCom. The legislation set new or enhanced standards for all U.S. public company boards, management, and public accounting firms. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. Continue reading →

Sarbanes Oxley was passed in 2002 in reaction to corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, and WorldCom. The legislation set new or enhanced standards for all U.S. public company boards, management, and public accounting firms. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. This law has effectively killed off the possibility of going public in the U.S. Continue reading →